Forex Dollar Hits Two-Month High as Expectations for Fed Rate Cuts Fade

The dollar reached a two-month high against its major counterparts on Monday, propelled by diminishing expectations for aggressive rate cuts by the Federal Reserve.

This surge in the dollar follows Friday's release of the U.S. jobs report, which far exceeded market forecasts, consequently leading to a sharp rise in U.S. bond yields and bolstering the nation's currency.

Federal Reserve Chair Jerome Powell's statements further fueled the surge in Treasury yields on Monday. Powell indicated that the central bank might delay any interest rate cuts, stating that they could "give it some time" before making any decisions regarding rate adjustments.

Amidst these developments, Japan's yen plummeted to its lowest level since early December, initially trading at 148.82 per dollar in early Asian trading before stabilizing around 148.43.

Similarly, the euro experienced a decline of 0.26%, settling at $1.0762, near its lowest level since mid-December.

The strengthening of the dollar propelled the dollar index up by 0.12%, reaching 104.17, its highest level since December 11.

Chris Turner, global head of markets at ING, remarked, "Markets continue to be bounced around by data and central bank speak," highlighting the volatile nature of the current market conditions.

Powell's comments during an interview with the CBS news show "60 Minutes" aired on Sunday night, indicated the Fed's cautious stance towards rate cuts. Powell suggested that the strong economy provided room for central bankers to gauge the trajectory of inflation before making any adjustments.

Charu Chanana, head of FX strategy at Saxo Bank, noted, "Reasons for a bullish USD trend continue to multiply... and now markets having to seriously reassess Powell's pushback to March rate cut pricing."

The reassessment of rate cut expectations was evident in Fed funds futures, which now reflect approximately 120 basis points (bps) of easing priced in for the Fed this year, down from around 150 bps at the end of the previous year. The possibility of a rate cut in March has diminished to roughly 16%, significantly lower than the 50% probability estimated a week ago.

Meanwhile, the pound edged down by 0.17% to $1.2612, nearing a two-week low. Despite revised data indicating a lower unemployment rate for Britain, the pound remained relatively unaffected.

The Australian dollar also experienced a decline of 0.16% to $0.6501, with the expectation of higher U.S. rates influencing its performance.

The rise in Treasury yields continued on Monday, with the two-year yield increasing by 8 basis points to 4.445%, following an 18 bps surge on Friday.

In other developments, China's central bank maintained stability in its currency through official guidance, despite setting the midpoint rate for the yuan higher than Reuters' estimate.

Focus now turns to the ISM non-manufacturing survey, scheduled for later in the day, which will provide insights into the health of the U.S. economy for January.

Additionally, data released on Monday revealed a larger-than-expected decline in German exports for December, attributed to weak global demand.

Also Read: Dollar Index Faces First Weekly Decline in 2024; Eyes on US Jobs Data